Q4 2020 Dream Industrial Real Estate Investment Trust Earnings Call
Good morning, ladies and gentlemen, welcome to the Dream Industrial REIT year end conference call for Wednesday February 17th 2021.
During this call management of Dream Industrial REIT may make statements containing forward looking information within the meaning of applicable securities legislation.
Forward looking information is based on a number of assumptions and is subject to a number of risks and uncertainties. Many of which are beyond dream industrial reach control that could cause actual results to differ materially from those that are disclosed in or implied by such forward looking information.
Additional information about these assumptions and risks and uncertainties is contained in dream industrial reach filings with securities regulators, including its include.
Including its latest annual information form and M D N a.
These filings are also available on dream industrial reached web site at Www Dot Dream Industrial REIT R E T Dot CA.
Later in the presentation, we will have a question and answer session.
To queue up for a question. Please press star one on your telephone keypad.
And your host for today will be Mr. Brian Paul CEO of Dream Industrial REIT. Mr. Pulse. Please go ahead.
Good morning, everyone. Thank you for joining us today for Dream Industrial reached 2024th quarter Conference call speaking with me today is let us Kwon, our chief Financial Officer, and Alex <unk>, Our Chief operating officer.
2020, it was one of the most unpredictable and challenging years in recent history. However, our team has done an excellent job navigating through these challenges and our business has been firing on all cylinders we.
We have continued to achieve significant strategic milestones in Q4 and carried that momentum into 2021.
We reported a 3% increase in NAV peso per unit in Q4, driven by CPI NOI growth and a lower cost of debt.
Our pace of CP NOI growth improved significantly in Q4 as our leasing momentum was realized we expect the pace to accelerate in 2021.
We continue to deploy our excess liquidity into high quality assets after completing over $620 million of acquisitions. In 2020, we look to continue that trajectory in 2021 and have already completed $138 million of acquisitions with an additional $215 million under contract Orient exclusive negotiations.
We raised nearly $450 million of unsecured debt in Q4 at an average fixed interest rate of only 65 basis points after swapping to euros, resulting in a 100 basis points reduction in the cost of debt for the entire REIT.
In terms of our operations. We believe the pandemic has permanently increased demand for industrial real estate are high quality urban portfolio continues to attract national and global E. Commerce occupiers leasing momentum continues to be strong and we signed nearly 2 million square feet of leases across our portfolio since the end of the third quarter.
These leases address a significant portion of our vacancies and will boost CPE NOI growth in 2021.
We continue to demonstrate strength in our acquisition platform by closing on over $620 million of assets. Despite the market disruption in 2020.
And just over a year, our European asset base totaled nearly $475 million, representing 15% of our total portfolio.
We have $355 million of acquisitions in our near term pipeline of which a $138 million of closed already with the remainder expected to close in the next 30 to 60 days all of these assets fit nicely within our focused investment strategy of acquiring high quality mid to large bay distribution and <unk>.
<unk> logistics facilities and strong industrial markets.
In addition to improving our portfolio quality. These acquisitions allow us to create significant value through active asset management enhancing our total return on investment.
For example, at our 116000 square foot property in Mississauga acquired in August of 2020, we had underwritten a 90000 square foot vacancy effective December 2020, as we expected to vacate the property.
Within a month of the tenant, leaving we have signed a seven year lease with a national logistics tenant at a 100% rental spread compared to the prior rental rate and three 5% annual contractual rent growth over the lease term exceeding our underwriting expectations.
Our recently acquired 527000 square foot class a distribution.
Distribution facility in Montreal allows us to add over 220000 square feet of additional density with a yield on construction cost exceeding six 5%.
Development will allow us to continue improving portfolio quality with a strong balance sheet access to low cost debt and.
And improved organic growth profile, we are now executing on our development program.
We have the capability and resources for development and anticipate commencing on 1 million square feet of development projects in 2021 across Canada, The U S and Europe.
In Las Vegas, we expect to commence construction on a 36 foot clear class a 460000 foot.
Distribution facility in mid 2021.
We are forecasting a developed yield 6%, which is 100 to 150 basis points higher than comparable stabilized product in the market.
We intend to expand an existing 110000 square foot property in the GTA by 40000 square feet with an estimated yield on construction cost of 8% in.
In Germany, we are planning, a 200000 plus square foot ex.
<unk> at our property in Dresden, which will nearly double the current footprint.
We're also evaluating redevelopments in our existing portfolio, primarily in the GTA and Montreal.
Strong growth in land values at market rents over the past 12 months supports the business case for redevelop it in these assets.
In Whitby, we are in the design and planning stage of a potential redevelopment of a 211000 square foot building that we acquired last year with the goal of Redeveloped the assets for approximately twice. The current density we expect to be in a position to commence the project once the current lease expires in early 2023.
In Mississauga, we are advancing planning of a potential redevelopment of a 200000 square foot complex that currently sits on a 10 acre land parcel.
We are evaluating the prospects of building a 40 foot clear modern logistics facility, which is expected to meet the strong demand for last mile logistics assets in the sub market and command premium rents and valuation.
Lastly, given the urban nature of our portfolio, we have a number of sites primarily in the GTA, where we believe there is opportunity to convert existing assets into mid and high rise residential uses resulting in significant value creation. We are in early stages of activating this potential for a few sites within our GTA portfolio and will rip.
For additional details as we make progress on these projects.
During 2020, we also made significant progress on ESG initiatives, we have summarized our progress and initiatives in our recent sustainability report that was published in December and can be accessed on our website for 2021, we intend to advance. This agenda further as we continue to collect more data established meaningful.
And realistic benchmarks and measure our progress in order to integrate our environmental and social obligations into the way, we manage our business and create value.
We are also exploring the possibility of investing in renewable power in our buildings, which will further our sustainability initiatives.
We continue to make significant progress on all aspects of our business and I will now turn it over to Alex to talk about our operations.
Thank you Brian good morning, everyone.
Starting with leasing industrial market fundamentals remain robust across all our markets supported by accelerated penetration of ecommerce.
Availability of rates have remained close to historic lows during the pandemic with healthy rental rate growth across our portfolio.
Leasing volume has increased significantly in all our markets, taking our overall leasing volume since the beginning of 2020 to $4 6 million square feet.
Since the end of Q3, we signed one 1 million square feet of new leases at an average rental spread of 20% over prior rents.
Including leasing up 600000 square feet of vacancy, which are expected to commence in the first half of 2021.
We also signed nearly 900000 square feet of renewals at an average rental spread of 10%.
We also achieved annual contractual rental growth of 3% and our recent renewals and new leases.
Earlier this year, we leased our largest vacancy to Amazon with rent payments commencing in Q2 2021.
Pro forma the lease with Amazon committed occupancy in the U S portfolio as well as our total portfolio will be approximately 97%.
As we anticipated spectra has vacated the smaller of the two main properties with average them in Montreal on January one 2021.
The asset is a 180000 square foot distribution and logistics property well located in Lasalle.
We have received strong interest in the assets and are already in negotiations with a major national distribution channel for the entire building and.
In addition, we received strong unsolicited interest from multiple parties in acquiring the asset assets at a significant premium to our current book value.
Spectrum has expressed intention to remain and there are other major space with us and push your bill.
Turning to our organic growth outlook was.
With the leasing activity over the past six months, our CP NOI growth profile has improved significantly from 2021 compared to 2020.
We reiterate our previous forecast of mid single digit CP NOI growth for 2021.
In terms of quarterly guidance, we expect CP NOI growth to accelerate through the year as new leases take effect.
On the operation strength rent collection levels in our portfolio have returned to pre pandemic levels and our tenant base has proven highly resilient.
We collected 98% of contractual gross rents due for January and 99% of contractual gross rents due for Q4 2020.
We have collected substantially all rents due for Q2 and Q3 2020 after adjusting for secrets.
The $2 $3 million of rent deferred during Q2 2020, we have collected over 90% already and we anticipate collecting the remaining amount in the near term.
Lastly, touching on our valuations during the quarter the value of our portfolio increased by $92 million, reflecting robust demand for industrial assets in our markets strong leasing activity and rental growth.
The outlook for rental growth remained strong and we look forward to engaging in value add initiatives to increase the returns surface additional value from our portfolio.
I will now turn it over to <unk>, who will provide a financial update.
Thank you Alex.
Fourth quarter was eventful and a successful end of another transformative year for DIR.
Financial results for the fourth quarter were strong and in line with our expectations.
I alluded comes from operations was <unk> 19 per unit for the quarter, 3% higher than the prior year comparative quarter due to higher NOI from a comparative properties in recent acquisitions and lower borrowing costs as we executed on our European debt strategy.
During 2020, we made significant progress on our financing strategy.
Wrong and flexible balance sheet, along with our superior tenant and geographic diversification enabled us to attain a triple B net investment grade credit ratings from D var ex in October.
We shifted the REIT to operate on a primarily unsecured financing model and with our European expansion, we're able to access low cost euro interest rates.
We raised nearly $450 million unsecured debt during the fourth quarter at an average rate of only 65 basis points after swapping to Europe.
The average interest rate on our in place debt has decreased by over 100 basis points over the past year and at the end of 2020 with 257% with opportunity to reduce that further.
We reduced our secured debt.
23 percentage of total assets with overall net debt to assets of 31% and net debt to EBITDA at six two times.
Over the course of 2020, our unencumbered asset pool increased by over 10 times to one 4 billion at the end of 2020, which represents 45 percentage of our total investment properties value.
In conjunction with our unsecured credit facility, which provides a significant amount of financial flexibility as we continue to focus on improving portfolio quality.
Last month, we completed a $259 million equity offering and used the proceeds to continue to pay off Canadian mortgages and to fund our near term acquisition pipeline.
With these mortgage repayments our average cost of debt has come down further since the end of Q4.
Acquisition pipeline comprises the previously announced $355 million of high quality acquisitions in Canada, The U S and Europe.
Closed on $138 million as these acquisitions to date in 2021 with the remainder expected to close in the next 30 to 60 days.
Pro forma these transactions our leverage is expected to be in the low 30% range with an unencumbered asset pool close to 60% of our total assets.
Currently retain over $250 million of acquisition capacity.
Okay.
Assuming average leverage for the year in the low to mid 30% range and net current foreign exchange rates prevail, we expect 2021 SSO per unit to be approximately 80.
Over 10% higher than 2020.
For the first quarter of 2021, we expect our SSO per unit run rate to be in line with that of Q4 2020.
Comparative property NOI growth acquisitions, and lower costs that are expected to be offset by slightly lower average leverage in the first quarter.
And then we expect our assets will run rate to increase in subsequent quarters as a competitor property NOI growth accelerates and we deploy our acquisition capacity.
I will turn it back to Brian to wrap up.
Thank you Louis we continued to take significant steps and positioning <unk> as the Premier industrial REIT in Canada, and delivering attractive overall returns to our unit holders will now open it up for questions.
Okay. We can begin our question and answer session.
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Our first question is from Brendan.
<unk> from Canaccord.
Hi, Good morning, everyone. Maybe just the first question on portfolio composition.
<unk> was the entry into Europe and.
You already have just slightly under 15% of the portfolio there just wondering.
How youre thinking about.
Your target pier pro forma target.
Geographical mix going forward given yes.
The ramp up in Europe has been.
So successful.
Yes.
Yes Brennan good question.
We have a target allocation of 20% to 25% potentially even to 30% in Europe, depending on the opportunities that we're able to find so we're under allocated there in terms of our eventual target. We're basically at our U S target, we'd like to grow more in Europe.
That gives us a lot of things.
The assets there performed well on their own it gives us access to very very low cost debt and then we like the geographic.
And tenant diversification across the three platforms of Canada, the U S and Europe. So we're on our way to continue to grow a little bit faster in Europe until we get to our target.
Allocation there.
Okay.
The idea would still need to have.
Majority waiting or about half weighting in Canada.
Yes.
Yes, roughly 20% targeted in the US 20% to 30 in Europe and the rest in Canada.
Okay, and then just a quick.
Question on <unk>.
Cap rates I noticed a pretty big drop in Ontario quarter.
Quarter over quarter, just over 50 basis points.
The drop in Europe that might have been because of adding new assets, but.
Maybe you could just speak to that.
The change in Ontario.
<unk>.
Function of kind of the new new appraisals.
Over the last.
Since the last quarter or changes in the marketplace.
Yes.
The number of those things I think as our asset quality goes up the cap rates will go down and the market continues to be.
More and more competitive pushing cap rates down Alex I'll, let you comment on where youre seeing cap rates and what's happening in these markets.
Okay. Thanks.
Specifically from Ontario, obviously cap rate is one metric in the evaluation process, we've seen significant acceleration in rental rates and rental rate growth.
Primarily in Toronto.
And that does push down the going in cap rate as without necessarily changing the overall total return outlook.
The total return gets more skew towards future growth.
Now having said.
When we look at the implied cap rates for the fourth quarter for Ontario relative to the to the third quarter and that is just last last quarter annualized NOI.
You bet.
Net cap rate drop is not as pronounced perhaps as you as you pointed out.
Simply because there is there is NOI growth as well in these numbers. So what we when we're looking at Q3 versus Q4.
Roughly 2020.
And change basis points.
Relative drop in the implied cap rate.
Okay. That's helpful I'll turn it over thanks.
Our next question is from Brad Sturges from Raymond James.
Yes.
Hi, good morning.
Maybe just to follow on that line of questioning.
<unk>.
When you're reviewing your.
Fair market values how much.
Of the intensification or redevelopment potential is being baked into into those numbers right now.
Yes, Hi, Brad basically number where the properties get evaluated as they are currently sitting there so.
<unk>.
The intensification of the future value is not considered in our in our <unk> numbers. It should be value add that we would we would do in the future all of the development we mentioned some of it.
Like Las Vegas, Greenfield, but a lot of it is intensification within our current portfolio, which would be.
Additive in terms of overall value to the portfolio.
Okay. So it's more really based on in place NOI.
Yes.
Okay.
Okay.
In terms of the.
Acquisition activity, so far today, it's been a pretty.
Robust start to the year for Dream industrial just curious.
<unk>.
On your expectations for the rest of the year. Once you close I guess, what's still in the immediate pipeline.
You had a pretty successful Europe over $600 million acquisitions is that something you think you can beat this year and where you think the regain.
What would be the timeline for the retailer to more or less reached stabilized financial leverage targets.
Yeah, Brett our team has hit the ground running in 2021, we've got a really active and robust pipeline. So we mentioned in the prepared remarks, but we're looking at a lot more things every day. So I as I mentioned, the Brendan I think we will likely grow in Europe faster, although we're seeing opportunities in Canada.
In our target markets as well as the U S. So we anticipate doing acquisitions, there as well I would expect we would have a similar or.
More robust acquisition.
Total acquisitions for 2021 compared to 2020 will likely be higher depending on kind of what opportunities. We can find Alex you can comment a little bit on where we're seeing opportunities, particularly in Germany, the Netherlands, where we're likely to grow faster.
Yes, we continue seeing us brands.
You suggested a strong pipeline of off market on market opportunities leveraging our local network.
So we are seeing more opportunities in Germany, Netherlands and <unk>.
As the travel restrictions.
Net lifted we will start looking closer at either.
The potential target markets in Europe.
Offer compelling fundamentals and.
And the ability to grow further.
On the content.
Okay.
In terms of asset sales any update in terms of your planning there and the potential to see some asset sales in western Canada. This year.
So we're looking at.
Kind of targeted asset sales targeted recycling.
We're looking at this every day of which assets would be good to recycle out of how can we continue to improve quality Alex.
Are you going to have an update on what we're seeing specifically in western Canada, Brad you're asking about.
Yes, so we've seen interest.
Some of our assets that we've identified as we've communicated at the end of 2020.
We have identified a list of non strategic assets from the assets that we would sell at the right time for the right price.
We have been engaging with potential users and.
Some investors.
On these assets over the past six months and we've received some interest in some of our non strategic assets and we're currently in discussions with.
Some users some investors on select opportunities in the west in Western Canada in various markets.
Obviously, we wanted to make sure that we hit the right price and the right terms. So we.
We're happy to hold these assets.
Or at the right price we will.
We will look at partnering with them.
Let's say if you can't comment on what that <unk>.
Program May look like right now for this year.
It's a bit hard to predict that because the real liquidity in western Canada is not as robust as it has in Toronto.
And the transaction volume has not been as robust as you know.
So it's hard to predict that.
We are in discussions with potential.
Potential buyers, but it's a bit difficult to do.
To forecast.
Okay, maybe my last question just too.
Discuss the Laval property with spectrum vacating just what's your expected downtime at the property at this stage in any general comment on what you believe the mark to market rent growth opportunity would be.
So we are in discussions with one prospective users who would like the space more or less immediately.
There will be some some fixed during period required so it will be at least a few months.
That deal advances.
If not we.
We expect that we will be in occupancy you kind of in the summer.
And as far as the Mark to market goes we expect that theres going to be.
Better growth profile from the assets going forward the immediate mark to market is likely going to be.
Roughly flat, maybe slight increase compared to the previous rent.
But theres going to be better growth profile from the from the assets over the lease term.
And we are already seeing from the unsolicited interest that we've received.
As those basis that the assets is going to be significantly more valuable as a result of this event compared to <unk>.
Compared to 2020.
Whether it's leased or vacant we've seen pretty strong valuation for the property. So overall story overall total return is going to be quite positive quarter for the company.
Okay, Great I'll turn it back.
Next question from Tammy <unk> of RBC capital markets.
Thanks, Good morning.
Maybe on the Amazon lease in Louisville can you maybe provide just.
Some background on maybe the terms.
The duration any rent steps in that lease.
And how did the brand sales compared to market rates.
Yeah, Hi, Tommy we can provide basically that the rent is going to commence in Q2 were not allowed to disclose the specifics of it yet is right on.
On market is slightly better than what we were forecasting.
The tenants certainly investing a lot in this space.
And Thats about all we are able to disclose at this point, we're certainly really delighted to have it.
Entirely leased that Louisville building entirely leased to Amazon They are a great tenant.
We will add a lot of value.
The rental rate is right in line with market.
We will disclose that when we are able.
Got it and then I guess is there any capital being put in by the read at all or.
For the most part the tenant Alex you can comment on any any landlord work, but it's quite minimal.
Yes, the market standard.
Yes.
Contribution from the from the landlord, but day tenant is going to be putting in significant amounts of capital to.
To get the property suitable for their last mile operations.
The capital day depends intends to invest is multiples of what we contributed.
Got it thank you.
Just with respect to the same property NOI guidance mid mid single digit level for 2021.
Do you see that sort of being fairly consistent or even across your three regions or just.
Just sort of continued leadership.
Canada.
Relative to the U S. Europe, just curious if you could break that down.
Yes, you bet.
Yes.
So with respect to the regional breakdown when we when we are.
Guiding mid single digits for the year.
Excludes Europe now Europe will be in our same property numbers later in the year.
But when we when we guided we are guiding without it because it's a full year guidance.
So with respect to how that breaks down we expect the candidate is going to be sort of in that in the midpoint of that guidance and you asked is going to be higher on the back of the popular.
Louisville lease up so U S is going to be in that.
High single digits in Canada is going to be sort of right in the middle of the mid single digit number for the year.
Okay. Thanks for that Alex just one last one I'm just curious with respect to the <unk>.
Curious on your rationale to maybe put that program in place and what do you see the.
A potential size of that program.
<unk> look like.
You bet pardon me I think it's a.
It's an additional tool as we go if you look at the kind of the three tools.
Drip ATM and then bought deals those kind of go in order of size and we expect to be able to issue equity through those three tools because you know the drip is.
That turned on the ATM will be used in the future as needed. However, we've got quite a bit of capacity right now in our balance sheet to do acquisitions, which we will use first I'll, let <unk> comment more just in terms of how we will manage that and how we will.
Potentially use that in the future go ahead lenders.
Sure.
Bryan It's Ed.
We view the ATM as a good tool to have in addition to the other tools such as the larger bought deal equity offerings.
It could turn out to be a cost effective means to finance smaller tuck in acquisitions smaller redevelopment projects and and we would utilize it in a manner that results from those value to unit holders.
But as Brian also mentioned, we don't currently anticipate using it in the near term.
Had ample acquisition capacity.
So this I will turn it back.
Our next questioner Himanshu Gupta of Scotia Bank.
Thank you and good morning, So just on the <unk> guidance for 2021.
I think you mentioned, 10% higher than 2020 almost 80.
So just wondering what leverage or range of leverage are you assuming net guidance.
Also what level of acquisitions or dispositions baked in your guidance.
You bet him and Sue.
We are basically low to mid thirties, as we start 2021, thats anticipated to grow over the year. However, it doesn't take effect until mostly later in the year. So we're basically average leverage in the low to mid <unk> for 2021, producing that <unk> that you mentioned Linda.
<unk> you can elaborate on that.
How we are forecasting leverage in guidance for <unk>.
Sure, Yes, and then as you mentioned.
Average, we're assuming low to mid <unk>.
Low to mid 30, percents I think pro forma.
Previously announced acquisitions that kind of gets that.
The 8% range for guidance and assuming average leverage in that low to mid 30% range and also that at current FX rates.
And you're right.
We remain the same throughout the year and that those are sort of in.
Thank you.
Or is there in the guidance.
Got it so maybe on the acquisition side, if you do let's say.
$500 million of acquisition all in about what do you have announced so far.
I mean.
That could lead to an upside to the guidance is that a fair statement I've been more acquisitions versus what has been already announced.
Bob do you need to some kind of upside there.
Yes, actually Thats very fair statement.
It would push leverage up into a couple of the upper thirties.
And and would be upside on the <unk>.
Sure. Thank you.
And then just on the.
The mid single digit organic growth in 2020, I know you provided some color.
But specifically for Western Canada, how many you have.
I think almost 800000 square feet of leases coming up for renewal in 2021.
Do you expect any softness and then store.
And then how is the housing market performing I know your occupancy was actually up year over year investment gain.
Sequentially as well.
Any update on the market day.
Yes, you bet have answered it the western Canada markets proven if you look at our occupancy and looked at.
The transactions, we've been able to do it's been quite a stable market there and it's performed okay. Alex you can elaborate on how youre feeling about leasing for 2021.
Yeah.
So do we.
We have been making good progress on leasing and Western Canada, we are working on.
Just over 100000 square feet of new leases right now across.
Our various markets.
So what that translates into for the year is that we expect.
Slightly higher.
Occupancy over the course of 'twenty one.
We still seeing that there is going to be.
Outlined at RMB, a hater, there's a bit of an over rent.
There we are going to see some leases roll to market down so that will offset that a little bit and for the year. We expected the same property in Hawaii and the west is going to be modestly up so kind of that low single digits.
A number from flat to flat to slightly up for the year on same property basis.
Got it.
Then.
Same subject collections in January.
Q4 has been strong flow.
For agenda items, two 3% is yet to be collected.
Is that any particular region, where you still need to collect.
Our day collection and less from Canada.
Similar to other regions in January as well.
Yeah.
Being consistent levels across across the regions.
What we're seeing in our collection numbers and that's also evidenced from our reporting over the last few quarters is that our collection rates for a particular quarter rises as time passes so.
Youll recall, when we published our Q2 2020 collection numbers they were in that 90.
98% range, so with just over 2% remaining uncollected.
Now we are virtually at 100%.
On the second quarter, and we've seen that for the third quarter and for the fourth quarter. So we expect that tenants are going to catch up on the on this outstanding balance.
Collection rates are going to be net.
North of 99% range for January and for the remainder of the first quarter of 2021.
Got it.
Then maybe just switching gears to acquisitions and I know you provided some commentary on the European acquisitions.
So just one observation you know most of them the acquisitions you have done so far.
At least channel.
So far I've been in the range of 20 million to $40 million acquisition price by property.
Is this where the opportunity lies in those countries compared to say portfolio acquisitions.
Then what Capex are you buying.
Dutch and German properties recently.
Yeah.
So we're seeing.
That's where the recent the recent acquisitions have come down.
The larger portfolios or the bigger portfolios theyre very very competitive.
So we have looked at those and I think it's somewhat coincidence, that's where our recent acquisitions have fallen down we're not necessarily targeting a certain perched.
Purchase price size.
Look more looking at asset quality and location.
But we do find a niche in that in that price.
Price range, often but I would say we will look at larger deals certainly smaller tuck in deals in markets that we've already got scale would fit as well.
Alex you can talk about kind of our pipeline and why its somewhat coincidental that we were seeing how these acquisitions in the similar price rich.
Yes, so when we look at our European deals and this is consistent with what we've been communicating over the course of 2020 is that we're seeing that day. There is that niche in terms of the competition.
In the market.
From call it $10 million to $40 million euro it becomes a bit less competitive than for much larger assets from larger portfolios and we are able to.
Get better prices getting deals faster again, some deals off market, but.
But having said that.
Bryan suggested we are looking at larger deals because they offer other advantages maybe there is less of a pricing arbitrage, but.
They offer scale they offer perhaps maybe better growth. So we're not disregarding those opportunities and we are definitely looking at a few now.
But as far as the pricing a little bit about pricing arbitrage day, we do see that in there.
The smaller to mid size of the assets.
Sure.
And just final question from me on that.
<unk> distribution facility acquisition.
Most of the Hudson square feet and expansion of over two.
100000 square feet.
Is the expansion going to be on a speculative basis.
The existing tenant is asking from most of these day.
How much are you looking to spend.
So the.
Good day or two expansion phases on that on that project.
That 200000 square foot volume breaks roughly into two halves.
So we are proceeding with phase one and shortly thereafter, we intend to proceed with phase II.
Generally our plan is to proceed on speculative basis. However.
There is interest from existing tenants in that expansion space and so we're engaging with them, but we're not holding the projects.
To get a tenant lineup.
As far as construction costs.
Currently we are in that low $100 per square foot range for four four that excitement.
Awesome. Okay. Thank you guys I'll turn it back.
Our next question from Matt <unk> from National Bank.
Hi, guys.
A bit of a different tack on an earlier question with regards to fair value I mean, if you look at the per square foot.
<unk> that you have on your books do you think you could acquire in Toronto at 160, a foot or Quebec at 150 in these days I'm just trying to get a sense of would have thought.
Markets are 100 Bucks a foot higher than that at this point.
Just some thoughts there.
Yes, Matt it's good observation all of our valuations are either for us or backward looking.
They often can't keep up with the actual market, we certainly wouldn't transact for our <unk> values and they are likely to continue to try to catch up to market, but it's.
<unk>.
By its very nature definition is backward looking so.
We would agree with you it's way undervalued in terms of price per square foot.
We anticipate continuing to unlock that value.
As we go and let US you can comment a little bit more on our on.
Our valuation process or how it's done.
Yeah, I mean, I won't add too much color to that.
Okay.
Just in terms of we only get a certain part of it.
The portfolio externally appraised they tend to be looking backwards previously prior transacted backwards.
A backwards looking metric.
And that really kind of assumptions.
Assumptions that need to go and tap into our internal valuation models as well.
So yes, I mean, it's not too much color to add in terms of just what kind of constrained with that process.
We do have ongoing conversations with them.
Theres too.
China.
Bring up to date, we see more recently from transactions and market rents.
On the down negotiations are active deals as well, but for the large part.
We need to fall in line with what the what.
But the real estate team.
Fair enough no standard of a loaded question there.
Just to add to that Matt.
What we've seen with external appraisers, and our valuation process such that we obtain not only we obtain appraisals for a part of the portfolio. We also obtained cap rates and discount rates from external appraisers and what we've seen is that there's been a little bit more difficult for them to keep up with the market during the pandemic.
As well as <unk>.
They do as I, just pointed out they do need to see a deal close to be reflected to reflect that in there.
Market assessment and so.
With that lag.
Obviously, the complexities of the pandemic.
We are seeing that impacting there their input.
Sure. It makes sense, it's been it's been a pretty crazy ride to this point and then on that note.
Just with regards to your leasing you disclosed a few lease from the DTA with pretty substantial mark to markets and then on top of that you're getting three 5% annual rent escalators is that unique to the GTA or or wherever those rent escalators b in other segments of the portfolio.
Okay.
We certainly are trying to implement.
Contractual rent escalators across the portfolio.
There would be.
Higher in the GTA compared to other markets. So.
In the GTA.
We're trying to get.
Close to 4% average is around three and a half.
In Quebec, we are pushing 2% to 3% in some cases, three and a half.
In.
Bert.
Pushing that 115, 2%.
In U S. It's about two 5% on average and in Europe.
It's indexation.
Matt we're trying to be leaders in this area. So it wasn't necessarily a phenomenon for for GTA in Quebec, a few years ago about three years ago, we started implementing it across our portfolio. Obviously Blackstone came in about pure industrial they started implementing it became much more of a market condition. It's been in the U S for many years as kind of a normal.
Normal lease provision and we're starting to implement that now are starting to see the fruit of our labor in CPE NOI and contractual rent growth. So.
But certainly something we're putting across the whole portfolio.
Europe, as well, where we can and so we will we expect to have more and more leases with contractual rent growth in it.
Okay that makes sense and then last one from me on the development side.
Las Vegas development, 6% yield on cost if you could provide some context as to where new assets at market rents would trade.
In terms of the development spreads you're getting and then it sounds like youre getting sort of high single digit yield on costs for some of the expansion options. So that's clearly a good use of your capital and I think you've defined the opportunity but.
Would be sort of the upside you'd expect there.
Yeah, we are stabilized.
Building that like we're going to build in Las Vegas would be four and a half to maybe upper fours in terms of the cap rate, we're going to build to a six so it's 100 Hunter.
100, 150 basis points spread in terms of the lift we would get by building it and leasing it ourselves.
And then.
It's similar if not wider spreads on billings that we expense. So when were six 5% to eight and some in terms of return on construction cost that could be even three to 400 basis points compared to the market.
Keep in mind that we've already got the land. So we're talking about yields on construction cost to expand the building.
But the value add and the lift on value by doing development is pretty significant.
Okay, perfect. Thanks, guys and congrats on a strong quarter.
Thanks Ben.
Okay.
Next question from Mike Martinez, So those are the main capitals.
Hi, everybody.
I just wanted to hone in on the development side as well.
Davidson.
We're putting more emphasis on your disclosures.
In your presentation.
And I think from already reported as a 1 million square feet that you could look to start this year.
In terms of the total.
Greenfield and expansions that you're doing do you have a rough sense of what the total capital required would be.
That non squamous.
Okay.
Yes.
Thanks, Mike So for for the year, we expect.
It will depend on the timing of construction commencement obviously.
So we're roughly budgeting as well.
40% to $50 million for the year and depending on the timing and some of these projects are again, a spillover into 2020.
Two.
Okay. So.
Into 2020, so if we just thought about the total budget for all of that million square feet.
Did you say 30 to 50 times two or.
The total cost.
It is going to be roughly in that magnitude, yes, I don't have the exact number in front of me, but we think we can get back to you, but it is going to be in that magnitude.
Okay, No problem and then.
I guess, presumably you own all the land so any incremental costs there to be able to pick the capitalization.
So the assets stabilized.
Let me correct price.
Mike that was really hard to hear you could you repeat that question.
Sorry, I was just saying with any incremental capital just given the nature of your program right now and you own the land in Las Vegas on the land on your share.
The expansion so what's the incremental spend at this juncture be all capitalized from an interest perspective, and then hit the income statement. When you stabilize the assets are delivered.
Yes, so we own the land on on all of those.
That would be how it's treated line as you can elaborate on on the accounting treatment of the development, but its all capital going into those into those assets.
Yeah, that's right Brian.
Haven't.
We haven't commenced.
Construction.
So there hasnt been a significant NAV spend to date.
To the extent that.
We incurred interest from.
Hey, Matt.
Page.
I believe.
We are able to capitalize on against the costs there.
Okay and thank you and then last one from me just with respect to the way you see your development program going.
I know, it's sort of got kicked off with with the acquisition of the Williams in Las Vegas, but in terms of where you see yourself focusing in the next two to three years.
Should we be thinking that most of the effort and capital will be going into the redevelopment opportunities that you see within the existing assets or do you expect to continue being active on the acquisition of land in your target markets in the U S.
Mike I would say, both we have greenfield as you know and love.
Las Vegas.
Doing a lot of development and expansion and adding density in Canada, we're doing that in Europe as well, we've got boots on the ground and ability to execute within our own company and all three of our target areas of Canada. The U S.
In Europe.
I would expect us to continue to add value and look for opportunities too.
Enhance yields by development in all three of those areas, where we have greenfield opportunities, we'll do it sometimes it is us.
Quite a bit of time excuse me a couple of years before you can execute but if we can buy properties like we're doing in.
In Dresden that we mentioned into Montreal, where we buy the property, we've got some interim yield and expand it we will certainly do that so I would say, we would look to to add to all of those fronts. As we continue to grow the company and add more development to our to our portfolio. Alex you may want to elaborate on that.
Yes, we.
We are.
We're seeing opportunities to expand assets.
We are looking for.
Land opportunities as Brian suggested and I think Mike also wanted to point out and Bryan also alluded to that in his prepared remarks is that we're looking at redevelopment opportunities in the portfolio. So.
Our property for example would be.
Is.
A 200000 square foot building that.
And the base case for that asset and that acquisition was that we would.
Redevelop the entire property and double the density so.
We're seeing more of those opportunities also in the market, but also in our portfolio.
As land prices as well as the as rent levels.
Yes.
Continue rising and that makes some of these cases more economical and.
Also working on one in Mississauga right now.
We will be along the same lines.
Okay.
That's great. Thank you for the update.
Our next question from Sam demeanor of TD Securities.
Thanks. Good morning, everyone. Just wanted to start off on on occupancy you did give some some pretty good guidance for same property NOI growth, but and also the occupancy I guess from the U S portfolio, but for the overall portfolio and maybe Canada, Europe, specifically, what sort of occupancy changes do you expect in the next couple of quarters.
Hi, Sam.
In terms of rent paying occupancy, we expect that it will continue trending upwards throughout.
Q1 and Q2.
In Q3 or for that matter.
And we expect that it's going to level off a little bit in the fourth quarter relative to Q3. So.
We are expecting moderate uptake in the first quarter and then.
Getting slightly closer to our pro forma occupancy in the second quarter and then.
Still at rising slightly from there.
And the line.
Occupancy.
So are you just going to say so you think you will see positive absorption throughout the portfolio.
At least through the first three quarters.
That's right yes.
Okay.
And I guess just on most of my questions have been asked but just on rent collections with the Lockdowns in Ontario, and Quebec is there any impact there on.
Tenants behavior in terms of in terms of paying rent.
Okay.
We have not seen significant impact so far as we look at our January collections in February collections numbers.
February collections are still coming in so we don't have complete data.
Dave.
The GAAP the various programs that are out there.
Including service are helping and.
We are definitely hearing that from from our tenants. There are some of our tenants who are not operational during the lockdowns.
They do contribute to that.
Outstanding balance.
However, we are working with them and that they are on.
On various support programs.
That cover a significant component of their rent and maybe there they have a few.
I guess more percentage of their rent is not covered in outstanding.
Okay. That's helpful and just finally on the acquisition pipeline has has it changed since the January press release.
And do you expect incremental new sort of new acquisitions to close as early as later on in the second quarter or was there anything new literally not close until the third quarter.
Yes, I think were basically on track as we disclosed before Sam.
We do have new new opportunities coming into our pipeline, which we expect to continue to execute on well into <unk>.
Q3 and beyond depending on.
How they develop so.
I would expect we would continue to to execute on acquisitions throughout the year.
It's hard to predict exactly when they fall Alex you can comment on on how you see those developing.
In all three of our regions.
Yes, so we are always adding to the pipeline.
In Europe well.
In Germany, specifically deals take longer to close them and if we add them to the pipeline today and the Netherlands.
Faster timeline from from.
Nation to closing.
And we continue being active in Canada, we have a few deals that we are re underwriting. So theres always always deals there were looking at.
Thank you I'll turn it back thank you.
Yeah.
Our next question from being more concerned of CIBC.
Thanks, Good morning, everyone just morning.
Questions for Brian more of a higher level of conversation, it's Brian you've gone through a couple of cycles.
We're looking at all time low interest rates.
Unprecedented demand for industrial product rental rates coming up double digit.
Clips.
What concerns you index and how does this compare to prior cycles that you've kind of lived through.
Yeah, Dan. Thanks for your question, we have been through a number of different cycles, they're affected different ways. The pandemic has certainly changed things.
A lot of what we look at so when we do acquisitions. We look at three things that are that we look at it like a three legged post if you look at the cap rate is one that's that's the high level metric that everybody looks at the headliner, but we also look at.
Where in place rents are compared to market and finally, we look at and maybe most importantly replacement cost so where are we related to replacement cost and as you look at this cycle, even though rents are growing there is a tremendous amount of competition in euphoria around industrial we don't think we're necessarily in that unhealthy or a <unk>.
Part in the cycle, because when you look at replacement costs, where things are trading compared to replacement cost.
They're continuing to go up so we.
We like our basis, we like continuing to buy in strategic locations replacement cost is going up because entitlement costs are going up materials are going up is becoming more and more difficult to build large industrial buildings, because they're inefficient land uses compared to other uses like residential or or other things and so it becomes.
There is more and more barriers to entry in this space.
We like the markets. We're in we're very focused on location, we're very focused on on geographic mix and tenant mix. So we think we are we're very happy with our portfolio we continue to.
Look for higher quality assets that will continue to increase the quality of our overall portfolio we've got.
Ah metrics that looks at every single one of our assets the things that we buy are above the mean or the average quality. The things that we sell are below the average quality and average quality has a lot to do with functionality clear height truck maneuvering area location of the assets. So so we're quite analytical when we look at our portfolio and what to recycle.
That's great and I guess, it's fair to say then in those prior cycles and that so I've seen a few myself.
If that speculative supply that comes into the market that tends to start to put pressure always around and that's kind of like when the punchbowl gets taken away.
Is it can you quantify that gap between.
How far rents you need to go before speculative supply would come into one of your key markets.
I would imagine that day, they might need to double from here.
Before we get the merchant builders coming in but can you maybe.
We certainly can quantify it and we do that each market is different but if you look at going back to my point in replacement costs in Ontario. For example has been very very little new supply.
Rents would need to grow certainly into double digits.
12, $11 $12 per square foot to justify what we'd call economic rent or what would support new construction based on replacement costs. So we've got a long ways to go in terms of rent growth and we expect that to continue before new supply hits. So we're at all time lows in terms of.
All time lows in vacancy all time highs in terms of occupancy we do expect more rent growth.
Four significant new supply hits the market that is the snapshot of Toronto.
Similar story in Montreal, most of the markets. We're in we do monitor whats youre talking about in terms of new supply and the <unk>.
Things that could significantly impact the fundamentals of the market. So we want to be in high barriers to entry market markets with with good quality product that's easier said than done because it's very very competitive.
Oh, that's great.
Good color it sounds like it's just the front end of Charles taken story was the best of times.
Yes.
I'll turn it back thanks, guys.
And there are no more questions.
Well, we'd like to thank everyone for your time today, and we look forward to speaking again soon in the meantime stay warm stay healthy and stay safe.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.